NCPA - National Center for Policy Analysis

High Drug Prices Due to Bad Regulation not Market Forces

October 2, 2015

It is unfortunate that a hedge-fund manager turned pharmaceutical executive, Martin Shkreli, decided to raise the price of a decades-old drug from $13.50 per pill to $750.

However there is a world of difference between that drug, Daraprim and specialty drugs like Sovaldi and Harvoni. The latter are newly invented medications that required many years and huge amounts of capital investment to achieve therapeutic advances for patients with serious conditions that radically increase their quality of life.

A dramatic price increase in a decades old drug should immediately attract competitors to whittle down the price, yet it does not because of regulatory reasons.

  • The Food and Drug Administration (FDA) has slowed down the rate of approval of generic drugs.
  • In 2010 the median approval time for new generic drugs was 27 months and the FDA currently has a backlog of about 4,000 applications.
  • Thus, generic competitors have to be able to enter very quickly if patients are to benefit from lower prices.

Limiting excessive price hikes by operators exploiting this regulatory morass will only be achieved by reducing the barriers preventing new competitors from entering the market. In addition, divesting drug makers could impose a contractual limit on buyers' price hikes.

Alternatively, the established drug makers could just not spin off the older drugs, but products get traded between pharmaceutical companies all the time; also, more entrepreneurial drug makers can innovate faster than the global giants.

Source: John R. Graham, "Martin Shkreli A Creature Of FDA Regulation, Not Pharma Industry's Greed," Forbes, September 28, 2015.

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